May 13, 1981
Summary
Respondents in the Fourth District have generally revised
their forecasts of real GNP upward for 1981 in response to first
quarter strength, but still expect slow growth over the remainder of
the year. Inflation may continue to moderate over the year, but the
underlying rate is unlikely to change much. Capital goods producers
still report a mixture of strengths and weaknesses. The steel
industry continues to operate at a high level, but recent softening
in orders suggests a typical summer slump ahead. Consumer spending
in the first quarter was buoyed by auto rebates, and some economists
expect a decline in the second quarter. The housing industry remains
at a standstill, despite scattered reports of increased lending
activity. Bankers expect continued strength in loans, accompanied by
still higher interest rates.
Outlook
Several participants from the Fourth District Roundtable,
held last March, have raised their fourth quarter 1980 to fourth
quarter 1981 forecast of real GNP from about a 2% gain to about 3%
as a result of a stronger-than- expected first quarter. A
participant, who had expected a negative second quarter, now doubts
that real GNP will show much change at all. A bank economist is now
more optimistic than early last spring, because he believes that
relatively rapid growth in the first quarter reflected earlier
momentum in the economy and that auto and housing are still in
serious trouble. Rising interest rates should not be a deterrent to
economic activity, according to a bank economist, unless record
interest rates are reached. Overall manufacturing activity, as
measured by the Fourth District's Survey of Manufacturing, is
expected to continue to expand into the second quarter, based on
strength in new orders, shipments and employment. However, a loss of
momentum is also suggested by the reduction in the number of firms
expecting increases in each of these indexes, except shipments,
during April.
Prices
Moderation in the first quarter GNP implicit price deflator
has not altered inflation expectations. Decelerating prices,
anticipated by several Roundtable economists, have been enhanced by
rebate programs in the auto industry and declining demand for
gasoline. While most items except energy increased at a reduced rate
in the first quarter of 1981, the underlying inflation rate remains
about 9%-10%, according to an auto economist. A producer of consumer
nondurables expects meat prices to increase during the summer,
following the stepped-up slaughtering of cattle in recent weeks.
Food prices in general may be helped by expected good weather, but
rising costs could lead to upward pressures on prices by year-end. A
trade economist expects inflation to move below double-digit rates
by the end of the year, but he also expects slower progress over the
longer term because of the insensitivity of wage costs.
Capital Goods
Production of producer durable goods continues to
strengthen, but rising interest rates and a softening economy are
likely to curtail capital spending this year. A producer of metal-
cutting machines reports that orders are strong, but a producer of
consumer-related electronic equipment reports that orders are
softening. A manufacturer of automatic controls reports strong sales
and has expanded his production facilities. However, area
construction activity so far this year is at best 10% below
depressed levels last year, according to a materials supplier,
partly as a result of state and local government cutbacks in
building and road maintenance. Heavy-duty truck sales have been set
back by rising interest rates, and the market now needs a strong
economic recovery over the rest of the year to exceed 1980 levels,
according to a major parts supplier.
Steel
Second quarter steel shipments should be stronger than the
first, but several steel economists report a definite slowing in new
orders in recent weeks. The industry's relative strength continues
to be associated with inventory building, with little gain in steel
consumption, according to an industry economist. Also, a shift from
imports to domestic steel has resulted from higher second quarter
trigger prices. Therefore, steel production is currently moving
toward full capacity, according to one industry economist. However,
the third quarter should experience the usual summer slump in orders
and shipments, because of a slow-growth economy which stalls steel
usage, a sharp drop in auto sales, and a reversal of the favorable
import trend as the value of the dollar continues to rise.
Consumer Spending
Consumer spending, aided by auto rebates, was
greater-than-expected in the first quarter, according to an
economist for a national department store chain. Real spending
should decline in the second quarter, but with a tax cut, spending
should recover by the end of the year.
Autos
Total auto sales dropped to an 8.1 million rate in April,
according to an industry economist. Area sales in April and early
May have lagged national sales. A local auto dealer reports that
auto sales are off over 50% from a poor level a year-ago, and 75%
from 1979 levels. Area sales should benefit from the introduction of
"J" cars, but an area dealer questions whether production will be
high enough to make a significant difference in overall sales. An
import dealer reports a 5% increase in area sales from year- ago
levels. Waiting lists for imported cars may reappear because of the
new import quotas, but one import dealer is skeptical that consumers
will switch to domestic cars. The import dealer doubts that the 7%
reduction in the volume of car imports is enough to benefit the
ailing domestic industry.
Housing
Area loan commitments for single-family housing in March
showed less than nominal seasonal gains, according to area S&L
officials. Recent increases in mortgage rates, now averaging about
16% for an 80% loan, and a substantial outflow of funds from S&Ls
have slowed activity further in recent weeks. However, one S&L
official reports success in lending to area builders with borrowed
funds. Also, second mortgages are now being offered to existing
customers at a variable rate, starting 25 basis points below the
market rate of 18%. However, another S&L spokesman states that
available funds are being arbitraged into higher yield short-term
assets. Hopes for a turnaround soon are fading in the housing
industry, according to an economist with a regional FHLB, because
mortgage rates are not expected to fall below 13% by year-end.
Banking
Loan demand should remain firm at least through the second
quarter because of substitution of bank loans for new bond issues
and because some narrowing of the yield spread between commercial
paper and the prime rate has made bank credit more competitive.
First quarter weakness in loans may have been partly associated with
overborrowing late in 1980, when fears of a credit crunch developed,
according to a bank official. With those inventories depleted,
businesses are now back in the market. A bank economist expects
interest rates to rise further in the weeks ahead, before falling
back by late spring or early summer.